Which of the following legal entities file documents with the state to be formally recognized by the state?
Limited Liability Company.
If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?
Minimal time and cost to organize
Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?
Both Corporation - Corporation and Limited Partnership - General partner.
Which legal entity provides the least flexible legal arrangement for owners?
Which legal entity is generally best suited for going public?
What document must LLCs file with the state to organize their business?
Articles of organization.
Which of the following entity characteristics are generally key drivers for small business owners in deciding which entity to choose?
Double taxation and Liability protection
Which tax classifications can potentially apply to LLCs?
All of these
Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would be least favorable?
From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has depreciated assets?
From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?
Partnership and LLC
If you were seeking an entity with the most favorable tax treatment regarding (1) the number of owners allowed, (2) the flexibility to select your accounting period, and (3) the availability of preferential capital gains rates when selling your ownership interest, which entity should you decide to use?
Which of the following is not an effective strategy for mitigating the double tax associated with C corporations?
All of these are effective strategies for mitigating double taxation
What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have?
no limit; 100; no limit
Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?
43.9% Crocker and Company pays taxes of $187,000 ($550,000 × .34). Therefore $363,000 ($550,000 - $187,000) will be distributed to the shareholder as a dividend. The shareholder pays taxes of $54,450 ($363,000 × .15). The total taxes paid on Crocker and Company's pre-tax income are $241,450 ($187,000 + $54,450), and the overall tax rate will be 43.9 percent ($241,450/$550,000).
If C corporations retain their after-tax earnings, when will their shareholders be taxed on the retained earnings?
Shareholders will be taxed when they sell their shares at a gain
Which of the following is most effective in mitigating the double tax?
Shift income from high tax rate corporations to low tax rate shareholders
While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?
Carried back two years, carried forward twenty years.
Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations compared with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation compared to the tax he would pay if it were an S corporation?
$7,500. Logan would pay $11,250 in taxes if Military Gear Inc. is a C corporation ($75,000 × 15 percent). If it were an S corporation, he would have to pay $3,750 in taxes (($75,000 - ($50,000)) × 15 percent). Thus, he has to pay $7,500 more in taxes ($11,250 - $3,750) currently if Military Gear, Inc. is a C corporation.
Which of the following is not an effective strategy for mitigating double taxation in a C corporation?
C corporations can pay dividends to their shareholders.
Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an S corporation, which type of investor group should Robert obtain capital from?
None of these.
What tax year-end must unincorporated entities with only one owner adopt?
The entity must adopt the same year-end as its owner
Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an S corporation, how much income will be allocated to Roberto?
$31,250. S corporations may not specially allocate income to shareholders; thus, the $125,000 companywide profit must be allocated to Roberto based on his ownership percentage in Bright Light, Inc. Roberto would receive 25 percent of the total profits, or $31,250 ($125,000 × .25).
Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?
$5,000. Because Bright Lights Enterprises is a partnership, the special allocation described is permissible. Reagan would receive 70 percent of the loss from his store, or ($17,500) (($25,000 × 70 percent)). Additionally, Reagan will receive 25 percent of the remaining profits not specially allocated, or $22,500 [.25 × (125,000 + 17,500 - ($75,000 × .7))] Thus, Reagan will be allocated a total of $5,000 of income.
When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?
None of these. This income will be taxed, but another type of tax will apply.
What is the tax impact to a C corporation or an S corporation when it makes a property distribution to a shareholder?
Recognizes gain but not loss